In our last post on this topic, we looked at the background on the 3% withholding tax on payments to government contractors. For a number of reasons, we doubted that the new IRC section 3402(t) would ever go into effect. It now looks as if the demise of this new tax on government contractors is all but certain.
"3% withholding"
Will the 3% contractor withholding tax ever go into effect?
By Husch Blackwell on
Contributed by Husch Blackwell Partner Bert Wolf, Esq.
Government contractors are relieved that they won’t immediately face having 3% of their invoices withheld as an advance against future tax liability. The IRS’s final rule implementing the 3% withholding tax won’t go into effect until 2013. Absent a material modification, contracts executed by December 31, 2012 will be exempt from the withholding tax entirely, at least until January 1, 2014. But that isn’t the end of the story. Here is a bit of the background on the source of the 3% withholding tax, why it has been delayed, and some thoughts on why it’s not a great solution to the problem at hand.